Saving for a child in 2026
Welcome to another addition of Written by A(ndrew) I(ntelligence)! In this piece I will be going over different account types you can open for a child, their intended purpose, and some pros and cons for each in my opinion. Read on!
Making the decision to set money aside for a child has the power to completely change their future. Whether it be saving for college, a special wedding, wanting to help them with a down payment on a first home, or any other goals you may have, sacrificing today for the next generation’s future benefit is a noble cause. Because each goal may have a different expected time horizon, desired risk tolerance, and special tax incentives to saving, you have a range of options. Let’s start with the basics, these are in no particular order
High Yield Savings Account
Uniform Gifts to Minors Act (UGMA) Brokerage Account / Unified Transfers to Minors Act (UTMA) Brokerage Account
Custodial IRA
Section 530A account (aka Trump Account)
529 Plan / Coverdell ESA
Bonus: Brokerage Account with child set as Primary beneficiary
High Yield Savings Account (HYSA)
Starting off at the lowest end of the risk spectrum, a High Yield Savings Account is a great way to save while also trying to protect your money. HYSAs earn a higher interest rate than typical savings accounts, while avoiding the volatility of other assets such as stocks and bonds.
These accounts also typically carry $250,000 of Federal Deposit Insurance Corporation (FDIC) insurance if opened at a member bank, and similar insurance is offered by the National Credit Union Association (NCUA) for accounts opened at Credit Unions.
The interest earned on these accounts is variable, meaning the amount of interest you earn in a given period is subject to the overall interest rate environment. Unfortunately, you are not locked into the Annual Percentage Yield (APY) you see advertised when you open the account. HYSAs are great for emergency funds, short term cash needs, and a good account to start teaching children the importance of saving money.
From a tax perspective, the earnings from these accounts are treated under the IRS “Kiddie Tax” rules. In 2026, the first $1,350 in unearned income (dividends, interest, capital gains) is tax free, the next $1,350 is taxed at the child’s tax rate, and anything over $2,700 is taxed at the parent’s marginal tax rate.
For savings goals longer into the future (college, first house, retirement), the stable but low return may perform worse than for example an account that invests in stocks that historically have higher growth potential.
Overall, think of the HYSA as the foundational savings account to put money aside for expenses you know your child will need in the very near future. If you are looking for an account to grow your money for the long run with a higher level of risk/return, I would look elsewhere. To open one you will need to either open it jointly with the minor, or open a custodial (UTMA/UGMA) account. More on that below.
HYSA Pros:
Account is highly liquid and cash is available when you need it
Cash is protected from losing value, compared to being invested in the stock market
Pays a higher interest rate than traditional savings accounts
Interest is paid on a compounding basis, meaning your account balance can grow faster compared to an account that pays a flat interest amount.
HYSA Cons:
Some banks have restrictions on the number of withdrawals you can make within a certain time period
The stable but lower returns in HYSAs compared to other accounts may not be in your favor for long term savings goals
Variable interest rates could lead to the account paying lower interest in the future (compared to a Certificate of Deposit which pays a set interest amount over a period of time)
UGMA / UTMA Brokerage Account
Stepping into our first set of investment accounts, a UTMA/UGMA brokerage account is where parents, grandparents, or guardians can save and invest money for a minor. Even though an adult opened the account and serves as the custodian managing the investments, the minor is the legal owner of this account and will receive the proceeds when they hit their state’s age of majority. This can range anywhere from 18 to 25.
Between these two accounts there are some small differences. An UGMA was created specifically for financial assets (stocks, bonds, mutual funds, ETFs, cash, insurance policies), while an UTMA was a later revised version that expanded the scope of ownership beyond financial assets to include rental properties, vehicles, fine art and even intellectual property. For this flexibility, UTMAs have almost entirely replaced UGMAs besides a few states who have not fully adopt them (South Carolina and Vermont).
What I like about UTMA/UGMAs is the ability to invest in financial markets for the child’s future, without having the proceeds tied specifically to education or retirement savings and facing the respective penalties if funds don’t go to those categories. For example, a UTMA brokerage account can be funded with the intention of paying for little Johnny’s future education alongside a 529 plan. But one day Johnny ends up getting a scholarship or instead decides to go to a cheaper school, while you originally planned for an expensive out of state private school. Since you added funds both towards a 529 plan and a UTMA, you can use the 529 plan to pay for the reduced tuition and little Johnny can now have access to the UTMA funds penalty free and use the funds to buy his first car.
Like the HYSA, income on these accounts are treated under the IRS “Kiddie Tax” rules and applied to the parents return if applicable. So if you are thinking “Why don’t I gift my child some appreciated stock, and sell it at their lower marginal tax bracket to save on paying taxes in my higher tax bracket?!”, the IRS is way ahead of you.
Also, I want to point out that once a contribution is made to an UTMA/UGMA, it cannot be reversed as it is considered irrevocable. So if you and your spouse were in a bind and short on the mortgage, you cannot legally take the money from your child’s account as it is considered stealing their property. Funds can be withdrawn while they are a minor however, but they must be for the benefit of the child above and beyond normal everyday parental expenses such as food, clothing shelter, etc. Things like paying for school, summer camps, specialized medical care, and the like would be permitted.
When it comes to preparing for college, an UTMA/UGMA actually hurts a minor’s need based application. Since FAFSA applies a more punitive rate to custodial accounts in the minors name (20% compared to 5.64% when the account belongs to the parents), this may impact your eligibility.
In the end, UTMA/UGMA accounts are a good way to invest for your child’s long term future, while providing ownership from day one. This ownership can get the minor more interested and involved in financial markets, and could be a good way to spark their curiosity in personal finance.
UGMA/UTMA Pros:
Flexibility - funds are not tied up specifically for educational or retirement purposes
No income requirements for the minor to open an account
Gives the minor access to the financial markets at a young age
UGMA/UTMA Cons:
Funds become entirely theirs upon the age of majority, so if you are worried about them blowing the money on something stupid you cannot stop them from spending it
Funds can be withdrawn but they must be for the sole benefit of the child on the account outside of normal parental expenses (food, shelter, clothing, etc.)
Unfavorable FAFSA classification
Custodial IRA
The first retirement account on the list, a Custodial Individual Retirement Account is great way to give a child a head start on funding retirement. Just like the above accounts, a parent, grandparent, or guardian opens up an account as a custodian for the minor. The account legally belongs to the minor, but the custodian has the power to manage the investments. The custodian also cannot pull back contributions since they legally belong to the minor.
Custodial IRAs operate similar to regular IRAs. They both support Traditional or Roth options, they have the same yearly contribution limits, and are typically locked up until 59½ (some exclusions apply). If a Custodial Traditional IRA is chosen, contributions are made pre tax, the account grows tax deferred, and withdrawals will be subject to future ordinary income rates. If a Custodial Roth IRA is chosen, contributions are made post tax, the account grows tax free, and the withdrawals will also be taken out tax free.
However, one big hang up with Custodial IRAs is the requirement for the minor to have taxable earned income. This can be in the form of a W-2 paycheck from a summer job, or a legitimate and documented self employed income stream (babysitting, lawn care, reselling, etc.). Typically a child is not required to file a tax return if their income falls under the standard deduction limit for a single filer ($15,750 in 2025), but a good way to show the IRS evidence of income is to have the child file a return anyways. In my opinion, I find contributing to a Custodial IRA for kids under the minimum age to work a bit dicey. I would not have confidence backing your story of your 5 year old doing yard work for the neighbors earning $100/hour.
Custodial IRA contribution limits are the same as regular IRAs; in 2026 that is the lesser of $7,500 or 100% of earned income. Let’s do an example to see what this looks like. Say little Johnny just got his first job as a busboy at a local restaurant for the summer. On his last shift before heading back to school, he gets final paycheck that shows his year to date earnings is $4,250. Since he is an avid reader of this blog, he knows his max contribution to his Custodial Roth IRA for that year can be $4,250.
One of the best parts about a Custodial IRA is the IRS does not care who funds the account. In our last example, little Johnny could have taken his entire summertime earnings of $4,250 and blew it on sneakers, a Ferragamo belt, and an e-bike. As long as little Johnny has the income documentation to prove his earnings, his parents can step in and make the contribution for him up to his income limit.
To summarize, the Custodial IRA serves it’s purpose best in situations when you want to save for a child’s retirement up to their earned income levels. This is not an account to be used for short term funding, or if you want the child to have penalty free access prior to 59½.
Custodial IRA Pros:
Gives the minor access to the financial markets at a young age
Roth contributions can be made in very low tax bracket years to lower lifetime tax bill
Parents can let their kids keep their earned money, and make contributions directly on their behalf
Custodial IRA Cons:
Money tied up until 59½ (with some exceptions)
Child must have legitimate earned income
Funds become entirely theirs at the age of majority, so there is no one to stop them from cashing it out, paying unnecessary penalties and taxes, and potentially buying something stupid
Section 530A account (Trump Account)
New this year, Trump accounts have officially gone live as of July 4th, 2026. Created within the One Big Beautiful Bill Act of 2025, section 530A of the Internal Revenue code allows for a parent or guardian to open an account that functions similar to a Traditional IRA. The guardian is to act in a custodial fashion, managing the investment allocation and making sure contributions are properly invested. Contributions are made with after tax basis, and grow tax deferred. Once the child turns 18, this account becomes 100% theirs.
Children born between January 1st, 2025 and December 31st, 2028 are eligible for a $1,000 seed contribution from the federal government directly into the account. But children born before these dates can still have accounts opened for them, they just wont receive the $1,000 free contribution. Thankfully, some charitable minded business people through their foundations (ex. The Michael & Susan Dell Foundation) have exercised their charitable muscles and are stepping up to donate to accounts who were born before the 2025 date (eg. $250). Eligibility is based on qualifying zip codes. To open a Trump account, you must either Form 4547 (cleverly named). This can be done either by attaching it to your tax return, submitting it via mail (NOT RECOMMENDED) or completing the form within your official IRS online taxpayer account. Visit trumpaccount.gov for more details.
A big plus to this account is the ability to fund a retirement account without earned income. Unlike a Custodial IRA, the Trump Account can be funded from birth until 18. Another powerful plus is it can be contributed in tandem with their Custodial IRA. So for example, little Johnny earned his $4,250 during the summer so he can make that contribution to the Custodial IRA, and his parents can still contribute to his Trump Account up the the $5,000 limit. The Trump Account contribution limits do not eat into the Custodial IRA contribution limits, they are separate.
Funds are invested into a short list of ETFs that provide broad equity exposure to either the S&P 500 index or a Total US Stock market index. As of today, there are no international equity investment options or fixed income funds. The fund fees are essentially rock bottom, with the default fund SPYM charging 0.02%. The legal maximum a fund can charge within this account is 0.10%. So while the fund fees work out in the investors favor, the lack of exposure to other investment types is something to consider.
From a tax perspective, this is not the most tax advantaged account out there. There is no upfront deduction like a normal Traditional IRA contribution, and there is no current option to make Roth contributions. Which would be nice given the child’s lack of income. While future planning opportunities are still uncertain with these accounts, one strategy that may end up working is completing Roth conversions after the child turns 18. This would require coordination of tax returns between parents and the child over multiple years, navigating the “Kiddie Tax” rules on unearned income while still be claimed as a dependent, accurately tracking basis over the growth years, and basically hoping that your child does not make a tremendous salary coming out of school (which no parent is wishing for!!!).
Another bonus to this account is contributions can be made by anyone, up to the annual limit. Some employers are also stepping in to offer matching contributions to the account. Think of this as a “free” return similar your 401(k)/403(b) match.
Overall, the account gets some hate for the lack of a tax deduction on the contribution and the ordinary income tax withdrawals will eventually get hit with, but me personally I am not a total hater. I like the fact that the account does not require earned income, and can be contributed to along side a Custodial IRA once the child starts their first job. Also, the fact that the money is tucked behind the IRA wrapper and cannot be take out penalty free (besides a few exceptions) until retirement creates a good barrier to keep the funds invested for the long run, unlike a UTMA/UGMA brokerage account. For those looking for accessibility to funds as their priority I would rather look elsewhere, but for the right set of goals I think one of these accounts could work. And the free $1,000 is a nice bonus!!!
Trump Account Pros:
Contributions not subject to income limits
$1,000 seed funding + additional charitable donations for eligible families/minors
Employer matching contributions
Funds have a 0.10% expense ratio cap
Trump Account Cons:
No up front tax deduction, while growth is subject to ordinary income tax later (No Roth option)
Limited to US only investment options
Funds are entirely locked up and cannot be accessed until adult, and are still subject to withdrawal restrictions until retirement
Lower contribution cap of $5,000 compared to a Custodial IRA ($7,500)
Account belongs 100% to the minor at 18, meaning parents lose asset control
529 Plan/Coverdell ESA
Both of these accounts are designed to pay for education expenses, but both have unique benefits so I am going to split them up.
First, the 529 plan is a state sponsored investment option that was originally created to help parents pay for the ever increasing cost of higher education at colleges and trade schools. But over time this account has become more flexible allowing for limited K-12 private school tuition payments, tuition for registered apprenticeship programs, allowing for a one time pay off of student loans up to $10,000, and ultimately the addition of a $35,000 lifetime rollover to a Roth IRA.
There are no set contribution limits, but each state typically sets a lifetime aggregate level. Once that balance limit has been reached, the account will stop taking new withdrawals. Luckily, most states limits are in the $300,000-$500,000 range so there is plenty of room to make contributions. If you wanted to front load a 529 plan thanks to a big commission or other windfall of cash, you can do so. As of the time of writing this article, currently you can make a lump sum contribution of up to 5 years worth of annual gift tax exclusion ($19,000 × 5 = $95,000) without having to file a gift tax return (Form 709). This can make some parents feel good about making contributions for years where they were not able to.
Another benefit of the 529 plan is the associated state tax benefits for contributions. To encourage saving for higher education, some states provide state tax deductions up to a limit for your contributions. Good to know for high earners looking to reduce their tax bill!
Like I said earlier, 529 plans are administered by each state. Because of this the financial company that offers one states plan may be different than another’s. Even though 529 plans are administered by individual states, you are not required to open the plan in your state. Fun fact - some financial advisors see selling you a 529 plan as a way to make additional income, but the firm they are affiliated with has only approved a selected list of states. So rather than advise you to open up your 529 plan on your own, they sell you another states plan. I’m not judging them, everyone has a family to feed. But going with another state’s option you are foregoing the tax benefits that may be offered by your state’s plan. Make sure you compare your current state’s plan to the one you are being sold.
Lastly, another nice thing about these accounts is the beneficiaries can be changed to another person. For example, you opened up a 529 plan for little Johnny when he was 3 years old, not yet realizing his athletic ability and book smarts. Because of his God given gifts, the big university in his state is offering a discounted tuition rate to become a student at their school. Instead of having to use the full balance, you now only need to use half. The other half can be used for Johnny’s little brother, who has his eyes set on a private out of state school!
529 plans are popular for a reason, as they allow for parents of all income brackets to save up a large balance to fund their child’s education. While funding one limits the options to where those funds can be used, I think if you are set on funding a future education expense its hard to beat this account.
529 Plan Pros:
Tax deferred growth + tax free withdrawals for eligible expenses
Possible state tax benefits on contributions + scholarships for staying in state.
Roth IRA option for excess funds not used
Can transfer unused balances to another beneficiary
529 Plan Cons:
Limit investment options, and the fund fees may be quite expensive
Limited use of funds without taxes and penalties
K-12 tuition limits
On the other hand we have the Coverdell Education Saving Accounts. Like 529 plans, a Coverdell ESA is used to fund education for a child, and they can be opened at a brokerage firm just like your brokerage account or IRA.
One of the key benefits to this type of account is the investment flexibility. Where 529 plans are limited to the investment options provided by the financial institution, Coverdell ESAs give you access to stocks, bonds, mutual funds, ETFs, and more.
Another benefit to Coverdell ESAs is the increased flexibility for K-12 educational expenses. While the 529 plan allows for an annual limit to be used for tuition only, Coverdell ESAs can be used for more educational expense including tuition, computers, uniforms, and transportation without a yearly cap.
Some downsides for these accounts include yearly contribution limited to $2,000 per beneficiary, high earners are restricted from contributing due to the income phase outs, contributions must stop after the beneficiary turns 18 and the account needs to be emptied or moved to another beneficiary by the time they turn 30, and they lack the Roth IRA feature recently added to 529 plans.
In my opinion I find Coverdell ESAs less attractive than 529 plans. While there are certain situations where funding one can work, the contribution limits and income phase outs limit the opportunities for use. But if you are looking to diversify your education savings across different account types, good news! You can contribute to both a 529 and a Coverdell ESA, you are not forced to chose one or the other.
Coverdell ESA Pros:
Expansive investment options
More flexibility on K-12 expenses
Coverdell ESA Cons:
$2,000 annual contribution limit
Income phase outs restrict high earners from contributing to the account
No contributions after age 18, account must be emptied by age 30
No Roth IRA rollover option
BONUS: Brokerage Account with child set as the primary beneficiary
Don’t click off the page just yet! I have one more account for you. While it is not an account for the minor to be the direct owner, this set up can help parents who may be concerned with handing over a large sum of money at the age of majority.
The set up is simple. Open either a single or joint brokerage account and add the child you are looking to pay as the primary beneficiary. This allows for the parents to control the assets within the account, and gift them once they believe the child is responsible enough to handle it.
Brokerage accounts in the parents name allows for ultimate flexibility, as they can withdrawal funds at any time for any reason (and pay the appropriate taxes on gains of course). Unlike the UTMA/UGMA brokerage account, if the parents originally put aside money for little Johnny but come into a rough patch, they can take money from the account and use it to make payments on whatever they need. They’ll just need to explain to little Johnny later on in his life why the account balance dipped for a bit!
The assets will eventually be passed on to the minor beneficiary once the original account owner(s) passes away. They will receive a step up in basis after the transfer on death, which is in my opinion the most powerful tax planning move out right now. If you are looking for additional control posthumously, it may be time to start thinking about setting up a trust.
From a taxes perspective, income earned from the account is handled on the parents return, no IRS “Kiddie Tax” rules apply here.
Opening a brokerage account in your name but earmarking the money for a child is a great way to keep your financial plan flexible. The money contributed to this account is not subject to education and retirement account restrictions, giving you access to funds when you need it. While you do lose out on the tax advantages of some other accounts, for some parents the piece of mind knowing the money is not locked up or getting automatically transferred to a not yet responsible child could help them sleep better at night. Plus the current capital gains tax of 15% is not that bad (unless you make a ton of money, then it’s higher) when comparing them to ordinary income rates, and keeping the assets in your name receives better rate from FAFSA.
Parent Brokerage Account Pros:
Parents control when the child is gifted the assets
Step up in basis on death of original account owners
Funds can be withdrawn at anytime, for any reason (no restrictions on what the funds can be used for)
More favorable FAFSA treatment for financial aid
Parent Brokerage Account Cons:
Account is not owned by the child
Parents could easily raid the account as there is nothing stopping them but their own strength
No tax advantaged qualities like other specialized account types.
Notice how I did not include permanent life insurance in this piece. Life insurance is not an investment. It is insurance. Yes I understand that there are use cases for funding a policy. but before I would make a recommendation to include it in a plan I would like to see the above options exhausted. Be wary of the sales pitch to open a policy!
As you can see, there are many ways to put money away for your child. Before you open any of these accounts, I recommend talking it over with your spouse, loved ones, or any other guardian you make decisions with to formulate a plan. Talk through what you want the money to hopefully be used for, what the ultimate cost will be, tax benefits to using a specific account, how much you can afford to save, and even how you want to teach good money habits to your child along the way.
If you are looking to get a savings plan started for your child, book time on my calendar HERE! My wife and I are working through this as well for our newborn :).
Thank you,
Andrew
The information presented in this blog is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through AMD Wealth Management LLC, an investment adviser registered with the state of New Jersey.